Does divestment work?
Beginning in the early nineteeneighties, students on college campuses across the U.S. demanded that their universities stop investing in companies that conducted business in South Africa, in protest of the apartheid system. As an example of social activism, the campaign was a phenomenal success: by the end of the decade, about a hundred and fifty educational institutions had divested. But did the campaign succeed in pressuring the South African government to dismantle apartheid? The answer is less obvious than you might think.
The economists Siew Hong Teoh, Ivo Welch, and C. Paul Wazzan studied how U.S. divestment movements affected the South African financial market and the share prices of US companies with South African operations. Divestments were expected, on average, to decrease share prices, but the study found that, in fact, political pressure turned out to have no discernible effect on the shares' public market valuations. According to the authors, a possible explanation of this finding is that “the boycott primarily reallocated shares and operations from ‘socially responsible' to more indifferent investors and countries.”
Although contemporary divestment campaigns have the potential to do a lot of good, we need to be clear about what their path to impact might be. Divestment is an example of socially responsible investing—the practice of either investing only in socially valuable companies or, more commonly, refusing to invest in companies that are deemed “unethical.” Socially responsible investing is big: according to a 2014 report by the Forum for Sustainable and Responsible Investment, roughly one in six dollars, or about eighteen per cent, of the $36.8 trillion in professionally managed assets in the U.S. is involved in socially responsible investing. And the movement has exploded in the past two decades. Students are lobbying their universities to divest from morally dubious industries, such as tobacco or firearms. More recently, a coalition of two thousand individuals—including celebrities like Leonardo Dicaprio—and four hundred institutions worth $2.6 trillion has pledged to divest from fossil-fuel companies.
However, if the aim of divestment campaigns is to reduce companies' profitability by directly reducing their share prices, then these campaigns are misguided. An example: suppose that the market price for a share in Exxonmobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from Exxonmobil, and it sells the shares for nine dollars each. What happens then?
Well, what happens is that someone who doesn't have ethical concerns will snap up the bargain. They'll buy the shares for nine dollars apiece, and then sell them for ten dollars to one of the other thousands of investors who don't share the university's moral scruples. The market price stays the same; the company loses no money and notices no difference. As long as there are economic incentives to invest in a certain stock, there will be individuals and groups—most of whom are not under any pressure to act in a socially responsible way—willing to jump on the opportunity. These people will undo the good that socially conscious investors are trying to do.
There is an important difference, therefore, between divestment and product boycotts. If a group of people believes that the Coca- Cola Company is harming the world, whereas Pepsico isn't, and accordingly switch their consumption from Coke to Pepsi, the Coca- Cola Company is harmed. Their sales decrease, and they make less profit. By contrast, if the same group of people stop investing in Coca-cola, and invest instead in Pepsi, things will quickly balance out, and neither company will notice much difference. As soon as an ethical investor sells a share, a neutral or unethical investor will buy it.
This means that divestment risks being harmful. Several studies have shown that, because of the pressure against investing in morally dubious companies, “unethi-